Rental Yields

Rental Yield is the amount of rent that is paid for a property over the cost. Rental yield is one of the major factors that determine the level of demand generated in the real estate market. An end user will make the decision to purchase the property if the rental yield of that property is higher than the EMI to be paid. That means the end user demand will go up if the rental yield is high. Similarly for investors who want to invest in a property to rent it out will also go up and this increases the investment demand. In a rational real estate market, the rental yield should be in sync with the interest charged by the housing finance companies. So that if the interest rate on borrowing is 9-10% then the rental yield generated should be at least half of that to that and the other half can be made up through capital appreciation. But the Rental yields in Maharashtra are in the range of 2.5-3% (Mumbai: 2.53% and Navi Mumbai: 2.41%) whereas the house loan interest rate is around 9.5%. The difference between the lending rate and the rental yield is high enough for a decline in demand. Even the interest rates for fixed deposits are around 7-8% making it a better income generating investment than real estate right now.  

The prices of the properties are also very high compared to the rental yield it generates. And not many people in Mumbai have that kind of income to afford such properties. So the incentive to invest in a property is the rental yield. With that being low not many families want to purchase a pricey property.

The current scenario in real estate market shows that the market is rigged i.e. despite so low demand the prices are high and rental yield is low. Ideally, as also seen in the stock market, if the market has to function efficiently the prices should crash so as to equate the supply with demand.

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